Here we aim to provide a correct and up-to date set of information on the Bitcoin network and its features and functionality.
Bitcoin is a peer to peer electronic cash system created by Dr. Craig Wright under the pseudonym Satoshi Nakamoto. It was first detailed in the Bitcoin white paper in October 2008, and the source code was released in January 2009. The first block was mined on the 3rd of January 2009.
Bitcoin allows electronic payments to be sent directly from one party to another, without requiring a central institution or server to process transactions and/or store funds.
The leaderless structure of the network is viewed as a resolution to The Byzantine Generals Problem allowing disconnected entities to follow a common direction without centralised instruction. This solves several issues previously seen as unsolvable in distributed networks, including the problem of preventing Double-spending of coins on the network
Bitcoin is primarily a payment system which supports peer to peer connection and Instant Transactions. Early in the History of Bitcoin payments required users to understand complicated technical details of Bitcoin’s technological underpinnings to make transactions. But developments such as Paymail and Simplified Payment Verification are changing the landscape and making it much easier for users to connect.
Bitcoin also supports the development of application layer protocols which make use of Bitcoin Transactions as a transport layer for information exchange. Several Application layer protocols already exist for BitcoinSV – for more detail see Building on Bitcoin. The Metanet fuses Bitcoin’s highly secure and instant sub-cent transactions with onchain data storage and transferability enabling efficient and secure web usage. This will bring forth an Internet of Value where Micropayments become a means to both access and monetize data.
Applications which make use of the immutable nature of the Bitcoin Ledger to store and retrieve data are emerging at an increasing rate. False Return scripts and other scripts that use Pushdata Opcodes to push data into Bitcoin transactions are creating new ways of recording data for public consumption. Bitcoin acts as a timestamp server allowing data to be validated and referenced using transactions.
The Bitcoin ledger is a record of all transactions that have ever been timestamped on the network. The ledger is formed as a Directed acyclic graph (DAG) where each transaction is a node. The graph starts at the Coinbase transaction of the first block ever found and via chains of digital signatures maps out the entire history of valid exchange actions, allowing the tracing of all bitcoins back to their creation.
Valid transactions that are broadcast on The Bitcoin Network are committed to the ledger by miners in Blocks. A block consists of an ordered list of transaction hashes and a header which includes the root generated by hashing the listed transactions into a Merkle tree, a timestamp, a reference to the block it builds upon and the means to validate the Proof of Work needed for other miners to accept the block as valid.
Blocks form a second layer DAG called the Block chain which is built by network miners in a competitive process. Each block forms a node in the graph with a single incoming edge from the block it is built upon. A block may have more than one outgoing edge in a case where multiple blocks were built upon it, but only one of those edges can becomes part of the longest chain of proof of work. A block without an edge to the longest chain of proof of work is called an Orphan Block.
The structure of the block chain DAG means that there is a clearly traceable path back to the first block mined. Blocks are discovered just under every 10 minutes on average, with miners using a predefined mathematical algorithm to control the difficulty of the proof of work process to maintain that time frame.
Transactions can be exchanged peer to peer using Simplified Payment Verification (SPV) to manage trust. SPV involves sending accompanying information with a transaction input that proves it is from a transaction that has been timestamped on the ledger.
Users can exchange unfinalised transactions without sending them to the network to be mined creating what are called Payment Channels. Payment channels allow users to conduct information exchange within valid Bitcoin transactions, only broadcasting a finalised transaction including the full value exchange to the mining network once the information transfer is complete.
Once a transactions is sent to the network, global consensus can be reached on the validity in less than 2 seconds. If a transaction is not accepted by any miners and added to a block, it does not become part of the ledger.
All Bitcoin Transactions are payments of some kind. Transactions are written in a flexible scripting language that is used to assign custodial control to each transaction output via the creation of arbitrary spending conditions defined by scripts.
The Bitcoin scripting language can be used in a way that is Turing complete, creating a Turing machine that uses the Bitcoin ledger as a tape, reading to and writing from the transaction graph as needed.
The script also includes opcodes that allow users to embed arbitrary data in transactions, providing for the creation of application layer protocols that use Bitcoin transactions as a transport layer.
Rewards paid to miners for the creation of a block are inscribed in what is called a Coinbase transaction. This transaction has a specific format and is always the last transaction in the block’s Merkle tree.
Nodes and Mining
The ledger is held on a distributed network of nodes who use hash based Proof of Work to compete for the right to extend it and as a means to enforce network rules. The proof of work of each block in the longest chain of work is incorporated into its subsequent block to form the chain structure.
During the mining process, a node gathers transactions from the network and evaluates whether they are profitable to mine before putting them into a block template. Block templates are created by calculating the root of a Merkle tree containing all of the transactions being mined. The order of transactions in the Merkle tree is not related to their position in the transaction DAG. As new transactions arrive, they are added to the tree, creating a new, updated template. A block is found when a miner successfully discovers a value that generates a hash less than the difficulty target. The miner must then propagate the new block to the rest of the network who must then build an additional 100 blocks on top of it before the winner can claim the block reward.
Nodes are operated by the Bitcoin mining enterprises who build the network. Bitcoin’s economic incentives are structured such that for the nodes to be most profitable at building the ledger they must be as closely connected to other well performing nodes as possible. This leads to miners forming a Small World Network which trends towards a Nearly Complete Graph where all miners are connected to all other miners. Miners gather transactions from users who connect in a layered network over the nodes at the core forming a Mandala Network. In this shell network, peers use Simplified Payment Verification to form a much less densely packed structure where information is exchanged in Payment Channels.
As Bitcoin scales, the nodes who comprise the network will be variously compartmentalised into specialised hardware. These clustered systems will be distributed globally, each being placed in a location optimised for its task.
As enterprise organisations, Bitcoin miners must operate as legal entities within a given jurisdiction and as such are bound to the laws and legal processes that exist in that jurisdiction. Through this, miners can be compelled to enact certain rules or perform certain actions in order to comply with the law. This can include the freezing or transferring of bitcoins stored on the ledger, or the rejection of transactions or blocks that try to spend bitcoins identified as proceeds of crime.
Unit of account
Satoshis are the ledger’s native unit of account and 100,000,000 satoshis is abstracted to one bitcoin. Satoshis are held in script puzzles called Unspent Transaction Outputs or UTXOs. These are transaction outputs which are held by miners in a quick access database called the UTXO set. During the spending process, UTXOs being used in a transaction are consumed and the solution to their puzzle script is recorded in the transaction.
Satoshis are issued by miners to themselves as a subsidy payment during the network establishment phase. As the network matures, the the subsidy dissipates forcing the miners to find alternate revenue streams. The payment allows miners to finance their operations through the payment of goods and services in bitcoin, spreading it through the economy.
Bitcoin operates on a fixed ruleset. So-called consensus rules include things such as the operation of the opcodes in Bitcoin Script, the rate at which new bitcoins are issued, the mathematical function used to calculate the target for the Difficulty algorithm and more. The protocol is agreed upon by the miners who control network operation.
There are no limits in the Bitcoin protocol. Any limits imposed are are put in place by miners who are incentivised to catch the largest profitable pools of transactions they can. Miners compete to offer better service to fee paying users by scaling their own capabilities.
Bitcoin has a rich history and has been attacked in many ways since its inception. For example, at the time of writing, certain other groups are wrongly using the ‘Bitcoin’ name to refer to their own projects. The most famous of these uses a software implementation known as ‘Bitcoin core’ with tokens from the ledger traded as ‘BTC’ (more information).